Credit Score to Qualify for a Loan without a Co-Signer

In the past credit played a much larger influence than it does in today’s lending environment. Even so, there is
no simple answer to this question because other determining factors must be taken into account: what kind of down payment will you be able to make on the purchase? Is it an investment property? The size of the loan you are attempting to acquire… all of the different answers one might provide to these questions will influence what type of credit score you must have to obtain financing.

Generally speaking in this market 620 is the lender requirement as far as credit is concerned. Although there are other means to consider regarding financing, seller financing for example or checking with your local credit union which will not take the same requirements (taking advantage of VA programs if available to you is also a smart direction to consider and discuss with your broker). Rather than focus on credit score, focus on your
debt to income ratio (DTI), and reserve assets. I make this point because if you develop proper habits, your credit score will take care of itself.

Your
DTI signifies how much money you have coming in (income) in relation to how much money you have going out (debt). If you make 1000 dollars a month, and spend 500 dollars a month in car payments, and credit card payments (utilities and telephones are generally not considered when calculating DTI), your DTI is 50% – that is 50% of your money is being spent on debt every month. As a general goal everyone should do everything in their power to keep their DTI as low as possible.
Why? A low DTI, implies a high level of saving (something we could all probably do more of). If you are obligated to spend less every month in bills (credit cards, car payments, etc…) there is a larger opportunity for you to save and invest. Your reserve assets are going to consitute liquid assets available to you. You will most likely use this for your down payment, but you also want to consider what will be left after you purchase the home. Having large pools of assets (retirement, annuities, savings, CDs, stocks, mutual funds, etc) will inevitably lead to higher income levels as you collect interest, dividends, write off losses, etc…

I make these points because documenting your income and assets is going to be a requirement for home financing if you expect to get the best possible terms. Your DTI these days, and reserve requirements are of equal importance (if not more so) in this market than your credit score. Point in fact, a co-signer is usually brought on board to compensate for the lack of reserves or income, not to correct a poor credit score. If two people are on the loan, the lender will take the lower of the two credit scores.

You will be qualified to buy a house with no co-signer when your DTI is under 41%, and after closing (down payment and closing costs) you have 6 months in Principle Interest Taxes Insurance (PITI) reserves., that is liquid assets left over. These are general rules of thumb I lay out,
not current lender requirements which change with the market.

I mentioned if you practice good habits, your credit score will take care of itself. Don’t keep large balances which require large monthly payments (a lot of which is interest), if you do you will have a high debt to income ratio. Pay those down under 20% or completely off to keep the interest accruing minimal, and the majority of your payment going towards the balance… this will keep your DTI low, and inadvertantly improve your credit.

By no means am I trying to suggest credit scores are not important, rather I am suggesting if we focus on proper spending habits, avoid unnecessary debt, and save wisely… homeownership is possible for anyone, and your credit scores will take care of themselves.

One of the myths in the use of
co-signers is that it can offset a low credit score. Co-signers are used primarily to strengthen an application that has some strengths, but not enough to stand alone. Sometimes it can be length of employment.

For example, a recent college graduate who has only a few months on the job, but has the income and credit to otherwise meet loan guidelines. Sometimes it is a shortfall on the income side, but with good credit. It would likely be a situation where income is going to increase at some point, but the added strength of the co-signer’s income and payment history make the loan a good credit risk.

So, you can see that other factors such as a debt-to-income ratio or
length of employment are just as important as a good credit rating in avoiding the need for a co-signer. And the higher the credit score, the better. But anything under 620 for a credit score will make it nearly impossible even if a co-signer is available. And any unresolved credit issues or 30 day late payments in the past 12 months even if the credit score is 620 or above may limit the chances for approval, too. And having the best co-signer in the world will not change that.

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